Economics Chapter 7 Flashcards

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Questions and Answers

What does economic growth refer to?

Increase in real GDP per capita over a time period (correct)

Economic decline

Decrease in real GDP

Increase in real GDP occurring in a time period (correct)

What is Real GDP Per Capita?

Measures economic growth; found by dividing real GDP by size of population.

Why is economic growth important?

It allows people to meet their economic wants and lessens the burden of economic scarcity.

What are the four phases of a business cycle?

Peak, recession, trough, expansion. Signup and view all the answers

What is Potential Output?

The real output an economy can produce when it fully employs its available resources. Signup and view all the answers

What is the GDP gap?

Actual gross domestic product minus potential output. Signup and view all the answers

What does Okun's Law state?

A 1 percentage point rise in the unemployment rate above full employment will increase the GDP gap by two percent of potential output. Signup and view all the answers

What is Inflation?

Rise in the general level of prices in the economy. Signup and view all the answers

What does CPI stand for?

Consumer Price Index. Signup and view all the answers

What is Demand Pull Inflation?

Increases the price level resulting from excess demand over output. Signup and view all the answers

What is Cost Push Inflation?

Increases in price level resulting from an increase in resource costs. Signup and view all the answers

What are Per Unit Production Costs?

The average production cost of a particular level of output. Signup and view all the answers

What is Nominal Income?

The number of dollars received by an individual for their resources. Signup and view all the answers

What is Real Income?

The amount of goods and services that can be purchased with nominal income adjusted for inflation. Signup and view all the answers

What is Anticipated Inflation?

Increases in the price level that occur at the expected time. Signup and view all the answers

What is Unanticipated Inflation?

Increases in the price level at a rate greater than expected. Signup and view all the answers

What are Cost of Living Adjustments?

An automatic increase in incomes of workers when inflation occurs. Signup and view all the answers

What is the Real Interest Rate?

Nominal interest rate less the expected rate of inflation. Signup and view all the answers

What is the Nominal Interest Rate?

Expressed in annual amounts currently charged for interest, not adjusted for inflation. Signup and view all the answers

What is Deflation?

A decline in the economy's price level. Signup and view all the answers

What is Hyperinflation?

A rapid rise in price level and inflation. Signup and view all the answers

What does the Rule of 70 tell us?

How many years it takes to double real GDP; found by dividing 70 by annual percent rate of growth. Signup and view all the answers

What is Productivity?

Measured as real output per unit of input. Signup and view all the answers

What is a Business Cycle?

Alternating increases and decreases in the level of economic activity. Signup and view all the answers

What is Peak in a business cycle?

The point at which economic activity is at its highest. Signup and view all the answers

Study Notes

Economic Growth

Economic growth refers to an increase in real GDP or real GDP per capita over a specified time period.
Real GDP per capita is calculated by dividing real GDP by the total population, providing a measure of economic performance relative to population size.

Importance of Economic Growth

Economic growth enables individuals to fulfill their economic desires and mitigates the effects of scarcity.
A slight difference in growth rates, such as between 2.5% and 3%, can profoundly impact standards of living over decades, potentially affecting basic survival needs.

Business Cycle

The four phases of a business cycle are peak, recession, trough, and expansion.
Business cycles vary in length, with fluctuations influenced by seasonal variations and long-term trends, complicating their measurement.
Capital goods and consumer durable goods industries experience more severe effects during cycles than consumer nondurables due to the discretionary nature of their purchases.

Potential Output and GDP Gap

Potential output represents the real economic output when all available resources are utilized efficiently.
The GDP gap is the difference between actual gross domestic product and potential output, which can be positive or negative.

Okun's Law

A rise of one percentage point in the unemployment rate above the full employment level typically increases the GDP gap by two percent of potential output.

Inflation and Price Indexes

Inflation denotes an increase in the general price level across the economy.
The Consumer Price Index (CPI) measures the cost of a fixed basket of about 300 goods and services used by the average consumer.

Types of Inflation

Demand-pull inflation occurs when aggregate demand exceeds production capacity, leading to higher prices.
Cost-push inflation arises from rising resource costs, resulting in increased price levels.

Income Measures

Nominal income is the actual dollar amount received over a period without indexation for inflation.
Real income reflects purchasing power, adjusted to account for inflation, indicating how many goods and services can be bought with nominal income.

Inflation Expectations

Anticipated inflation is the price rise expected to occur, while unanticipated inflation occurs at rates higher than those expected.
Cost of living adjustments are automatic income increases for workers to maintain purchasing power during inflation, ensured by collective bargaining.

Interest Rates

Real interest rate represents the nominal interest rate minus the expected inflation rate, reflecting true purchasing power.
Nominal interest rate indicates the current annual interest charged, not adjusted for inflation.

Deflation and Hyperinflation

Deflation refers to a general decline in the price level within an economy.
Hyperinflation describes a rapid and extreme increase in the price level, leading to severe economic instability.

Growth Measurement

The Rule of 70 calculates the time it takes to double real GDP by dividing 70 by the annual growth rate percentage.
Productivity is assessed as real output generated per unit of input, indicating efficiency in production.

Business Cycle Overview

The business cycle comprises periodic expansions and contractions in economic activity, with its four stages being recession, trough, expansion, and peak.

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Description

Explore key concepts from Chapter 7 on economic growth through flashcards. This quiz covers important terms, their definitions, and the significance of economic indicators. Enhance your understanding of real GDP and its impact on the economy.